Technical Analysis

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Technical Analysis

• Bill Pope

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Fundamental Analysis

• The study of
• Company,
• Products, Management
• Sales, Earnings, Cash Flow, Debt,
• Stock Price to Book Ratio, Stock Price to
  Earnings Ratio
  
• Demographic trends, potential demand for
  products
  
• Monetary policy, etc
• To determine what a stock should sell for.

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Fundamental Analysis

• Problems
• Getting all the necessary data.
• Analyzing all the data
• Predicting the future
• Efficient Market Theory
• Current price reflects all currently known
  information and expectations.
  
• So you must also predict the future better than
  others.
  

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Efficient Market Theory

• If Efficient Market Theory were true
• P/E Ratio would always be the same
• as long as Bond yields remained constant.
• A quarterly graph of P/E Ratio would be
• straight line.

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But P/E Ratio isnt flat!

• So there must be another reason stock prices
• go up and down.

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Market Principles

• What makes a stock price rise?
• A new product?
• New management?
• Low Debt?
• Low Price to Book Ratio?
• Higher profits?
• Internet stocks rose 1000 on no profits.
• Stocks often drop on higher earnings
  announcements.
  

Maybe
Sometimes
Not Generally
Not By Itself
You would think so, but no.
More buyers than sellers at a given price? Yes
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Market Principles

• The Demand / Supply graph

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Market Principles

• What makes more Buyers than Sellers?
• A positive change in investor sentiment about
  fundamentals.
  
• Why trends start, But.
• Must have all the data,
• Know how to analyze the company, the economy and
  
  
• Fed Monetary Policy.
• Predict the future better than others
• Greed - Fear of missing a move that has already
  started.
  
• Why Trends continue beyond reasonable values.
• Desire to play like the Big Boys (The
  Follow-the-Leader game)
  
• Why fundamentally weaker stocks rise with others
  in their sector.
  

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Technical Analysis

• The study of current and historic Price and
  Volume action to
  
• Discover what a stock, fund or index is doing
  right now.
  
• Note the current/prior range of Trader Greed and
  Fear.
  
• Watch for changes in Investor Sentiment and
  Emotion.
  
• Detect when a Trend or Trading Range has probably
  started or ended.
  
• Predict what a security is likely to do continue
  doing in the near term. Inertia
  

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Technical Vs. Fundamental Analysis

• Fundamental Analysis studies
• Company Facts and Future Predictions.
• Technical Analysis studies
• Investor Trader Sentiment and Emotion.

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Premise of Technical Analysis

• All known Fundamental Information are shown in
  Price.
  
• All changes in Emotion and Sentiment are shown in
  Price and Volume action.
  

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Basic Tool of Technical Analysis

• The Chart
• A picture of changes in Investor Sentiment and
  Emotions over time.
  
• Shows where Trader Greed became excessive and
  turned to Fear Resistance
  
• Shows where Trader Fear became excessive and
  turned to Greed Support
  
• Shows when Investor Sentiment has changed.
  Breakouts above Resistance or below Support
  
• Show Investor Commitment Big Volume Breakout
• Shows when the Public is jumping in Up trends
• Shows when the Pros are bailing out Down trends

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Charts Shows Where

• Investor Sentiment
• Turned Negative
• Turned Positive
• Pros bailing out
• Public jumping in
• Trader Emotion
• Greed turned to Fear
• Fear turned to Greed

Break Down
Breakout
Resistance
Support
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Chart Presentation Styles
Line Chart
Bar Chart
Total Return or Comparative
Candlestick
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Chart Timeframes

• Monthly
• Weekly
• Daily
• Intra-day
• Hourly
• 10 minute
• 2 minute,

Is the Market Fractal? Yes and No.
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Market Participants
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Chart Timeframes by Market Participant
The Factor of 5 Rule.
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The Popes Opinion

• Technical Analysis works best
• Short Term (Swing) Trading
• Large-cap mature Stocks .
• Asset Class Indices using Closed End or ETF
  Funds.
  
• Intermediate Term Trading
• Small-cap new High Growth Stock.
• Asset Class Funds.
• Long Term Trading
• Mutual Funds on Weekly Chart
• (due to Redemption Fees).

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Asset Classes

• Asset Categories Stocks, Bonds, Cash
• Sub Category Characteristics
• Capitalization Large, Middle, Small
• Objective Growth, Value
• Geography
• Region US, Europe, Asia, Latin American
• Country US, Germany, Japan, Mexico, etc.
• Yield High, Medium, Low
• Risk (Volatility) High, Medium, Low

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Asset Class

• Securities with similar characteristics and
  behavior.
  
• Example
• Stocks Small Capitalization High Volatility
  Growth
  
• Small Cap Growth Stocks.
• Why similar Behavior? Follow the Leader game.
• Factors influencing a securitys performance
• The General Market 50 factor
• The securitys Asset Class 30 (80)
• The security itself 20

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Asset Classes (Of Interest)
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And Now Back to Charts
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What Questions can Charts Answer?

• Universe Selection Questions.
• Individual Security Selection Questions.
• Timing Questions.

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Universe Selection Questions?

• (For IT Sector or Asset Class Rotators)
• What Sectors or Asset Classes should I watch?
• Which markets fit my trading style and time?
• Which are too volatile for my risk tolerance
  (fear)?
  
• Which are too slow for my needs (greed)?
• Who trades the securities in this Sector/Class?
• Do they have a shorter time-horizon than the one
  I can trade?
  
• Can I out trade them?

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Total Return Comparison Chart
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Universe Selection Questions

• (For ST Swing and Day Traders)
• Which Securities have tradable patterns?

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Short Term Tradable Patterns
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Swing Tradable Patterns
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Security Selection Questions

• (For IT Sector or Asset Class Rotators)
• What should I Buy?
• What are the Markets doing right now?
• Which are in Up Trends?
• Which has the steepest trend?
• Which has the best trend?
• Which are attracting Investors?
• Which are attracting Money?

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Steepest TREND?
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How Indicators Help
A Cycle Indicator
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Steepest TREND!
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BEST Trend?
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BEST Trend !
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Security Selection Questions

• (For Stock Pickers)
• Which Stock just brokeout on Big Volume?

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Big Volume Breakout
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Big Volume Breakout
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Entry Timing Questions

• (For IT Traders, Rotators, Stock Pickers)
• Has Investor sentiment recently changed?
• To positive Breakout
• To negative Breakdown
• Are Institutions coming in?
• Big Volume
• Accumulation Pattern
• Is the Public being drawn in?
• Up Trend
• Have weak players pulled out?
• Pull-back (Buyer Remorse)

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Breakout and Pull-back Patterns
Pull-back
Breakout
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Up Trend Patterns
Higher High
Higher Low
Higher High
Higher High
Higher Low
Higher High
Higher Low
Higher High
Higher Low
Higher High
Higher Low
Higher Low
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Exit Timing Questions

• (For All)
• Has Investor Sentiment become Negative?
• Up Trend Line Broken
• Support Breakdown
• Lower High, Lower Low Pattern
• Has Trader Emotion turned to Fear
• Big Volume Breakdown
• Extreme Momentum Reversal

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Big Volume Breakdown
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Topping Patterns
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How Indicators Help
A Momentum Indicator
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ST Trader Timing Questions

• (In Addition to the above)
• Where are other Traders likely to buy and sell?
  
  
• (Where is Support and Resistance?)
• What is the measuring objective from the last
  pattern?
  
• Has the trend on 1, 5, 10 Minute Charts reversed?

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Technical Analysis Aids

• Chart Patterns
• Mathematical Indicators

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Chart Price Patterns
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Chart Volume Patterns
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Mathematical Indicators

• Transforms of Price and/or Volume action
• Remove Noise through smoothing (averaging).
• Smoothing introduces lag.
• Needed for Computerized investing.
• Moving Average Computerized Trend Line
• Generate mechanical Buy and Sell Signals.
• An attempt to remove subjectiveness and emotion.
• Most created as a stand-alone trading system.
• All have strong points and weak points. Over 180
  cataloged by International Federation of
  Technical Analysts.
  
• Best to use a combination.

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Types of Indicators

• Trading Range
• Trend Following
• Momentum
• Cycle
• Volatility
• Risk Return
• Most are graphical, some are Statistical

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Trading Range Indicators

• Aroon
• Directional Movement System
• Chande Momentum Oscillator
• Commodity Selection Index
• MESA Sine Wave
• Polarized Fractal Efficiency
• Random Walk Index

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Trend Following Indicators

• Moving Averages
• Linear Regression Line
• Parabolics
• Channels
• Price Channels
• Andrews Pitchfork
• Envelops
• Bollinger Bands
• Average True Range Bands

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Momentum Indicators

• Momentum
• Moving Average Convergence Divergence (MACD)
• Relative Strength Index (RSI)
• Stochastic
• Williams R

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Cycle Indicators

• Commodity Channel Index
• Detrended Price Oscillator
• MESA Sine Wave
• Stochastic

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Volatility Indicators

• Standard Deviation
• Bollinger Bands and Average True Range Bands
• Chakin Volatility Index
• Commodity Selection Index
• Ulcer Index
• Accumulation Pattern Indicator Pope

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Risk Adjusted Return

• Sharpes Ratio- William Sharpe
• Ulcer Performance Index Martin and McCann
• Retracement Adjusted Return - Pope
• Targeted Retracement Adjusted Return Pope

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Market Health Indicators
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Indicator Usage

• Universe Selection
• Security Selection
• Timing Non-Volatile Markets
• Timing Volatile Markets
• Assessing General Market Health

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Universe Selection
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Security Selection - UPI
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Security Selection RAR (Pope)
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And The Winners Are
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Timing Non-Volatile Markets

• Non-Volatile Markets can be timed with
• Single Moving Average
• Filtered Moving Average (Percent Bands/Envelope)

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Single Moving Average
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Single Moving Average
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Filtered Moving Average
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Timing Volatile Trending Markets

• Volatile Markets are Volatile because
• Traders play in them!
• We can either
• Smooth out the Traders action, or
• Trade only when Traders and Investors Confirm
  each others direction.

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Dual MA Crossover System

• Uses two Moving Averages
• Shorter MA smoothes Traders Price Fluctuations.
• Longer MA represents the Trend.
• Works better on volatile securities than
• Single MA,
• Filtered MA.

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Dual MA Crossover System
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Dual MA Crossover System
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Dual MA Confirmation System
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Dual MA Confirmation System
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Cycles and Momentum Studies

• Adding Cycle and Momentum Indicators can improve
  your decision making.
  
• Cycle Indicators
• Commodity Channel Index
• Stochastic
• Etc.
• Momentum Indicators
• Moving Average Convergence Divergence
• Relative Strength Index
• Etc.

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Adding Cycles Studies
Dont Buy when Over Bought! Dont Sell when
Over Sold!
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Momentum Divergences
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Momentum Divergences Reversals
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Trading Non-Trending Markets
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Trending Vs. Non-Trending Indicators
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SUMMARY and CONCLUSION
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• The Magic of Technical Analysis is not in
• Charts, Indicators, or Computers.
• Its in what the above
• enable you to do
• in your Mind!